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On Protectionism and Competitiveness

A common argument heard for protectionism is that it increases/enhances competitiveness of the domestic firms, that it “levels the playing field” (this argument used to be made primarily when talking about “infant” industries in a country, but more recently is used to justify actions taken against China and other “trade manipulators”). The problem with this argument is that it is simply impossible.

Just as minimum wage cannot create new jobs, it just outlaws current jobs, so it is with protectionism. Protectionist tariffs do not create more efficiencies and competition, they just outlaw/restrict certain efficiencies and competition. This doesn’t make the protected firms more competitive. In fact, it reduces the competitiveness of the protected industries!

Allow me to explain via metaphor:

In the 2016-2017 NFL season, the Cleveland Browns were the worst professional football team (as measured by the win-loss record). “This is hardly fair,” say the Browns ownership. “The other teams are so much better than we; we only got a single win! This is costing us revenues from ticket sales, jersey sales, etc. Other teams can woo big-name free agents better than we can and we need to mortgage our future by trading draft picks to get anyone good via a trade. How can we expect to compete?” NFL commissioner Roger Goodell agrees: “In order to increase league competitiveness, I hereby issue the following decree,” he says. “Whenever a team is playing someone worse then them, they must bench their top players at each position. This will allow teams like Cleveland to be more competitive!”

I do not think anyone would argue that Mr. Goodell is right in his proclamation, that hobbling better teams makes the League more competitive. It reduces the competitiveness of the League. It reduces the quality of the product of the League. The Cleveland Browns are helped by this rule change, make no mistake, but only at the expense of the rest of the League and the consumers of its product (football fans).

Like much of protectionism, the argument for tariffs on the grounds of enhancing competitiveness relies on a half-truth, an economic sophism (to borrow Bastiat’s term). It relies on the seen effect of the benefit to the protected firm(s), but does not see the unseen costs to everyone else.

If imports were stopped by a stroke of a pen, there would still be a trillion dollars of pent up demand per year from American consumers. If the demand for goods couldn’t be satisfied with imports, domestic manufacturers would take up the slack, creating jobs. Things would be more expensive, sure, but the GDP would grow a lot faster, more people would have good jobs.

Yep. To protect inefficient and ineffective producers. And, then you forget the loss of jobs that will occur as the US export industry shut down because other countries retaliate against US manufacturers.